the man and society satisfy the
Applied Economics
Economics
 from the Greek word oikonomia, the
management of the household
 study of how society manages its
scarce resources for optimum use
 science and art to make a living
 proper allocation and efficient use of
the scarce (limited) resources for the
maximum satisfaction of human
wants (unlimited wants)
Importance
 For Survival: one must economize to
survive this world
 As a Part of Society We are All
Involved: everyone is concerned in one
way or another with allocating scarce
resources in order to meet one’s
multiple desire
 To Learn Particular Way of Thinking:
developments in the country make
modern society more complex, therefore
increases the need for man to study
economics in order to efficiently solve
his own economic problems brought
about by these complexities
Economics as a Science
 systemized body of knowledge
utilizing both deduction and
induction in explaining various evets
and happenings in the country
Economics as a Social Science
 interrelated studies that deals with
man’s relationship to his physical,
social, and cultural environment
 systemized body of proved or
demonstrated explanations about
observable phenomena regarding
unending human needs
 cannot be divorced from any other
social sciences and cannot make
sense without them
1. History – to learn from the past
2. Psychology – to learn how man
thinks and behaves
3. Philosophy - quest of
enlightenment
4. Geography – to determine main
source of livelihood
5. Anthropology – to learn needs of
man
6. Political Science – political system
determines economic system
7. Sociology – changes in society
change society’s demands
Microeconomics
 how households and firms make
decisions and how they interact in
the market
 Ex: oil crisis in Libya, typhoon,
shutdown of factory, shortage of
vegetables
Macroeconomics
 study of economy wide phenomena
including inflation, unemployment,
and economic growth
 Ex: increase in minimum wage,
unemployment increase of 1%
Microeconomics vs Macroeconomics
 both are closely intertwined since
changes in the overall economy arise
from the decisions of millions of
individuals and it is impossible to
understand macroeconomic
developments without considering
the associated microeconomic
decisions
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  both has its own distinction because
they address different questions and
sometimes takes different
approaches and are often taught in
separate courses
DEMAND AND SUPPLY
Law of Demand
 the higher the price, the smaller the
quantity
 the lower the price, the bigger the
quantity
Demand
 relation showing the quantities of a
good that consumers are willing and
able to buy per period at various
price
 range of quantities that buyers are
willing able to buy in a range of
prices
Demand Wants and Needs
 consumer demand and consumer
needs and wants are not the same
thing, as wants are unlimited, nor is
demand the same as need
Determinants of Demand (Factors)
1. Substitution Effect
 effect of change in the relative price
– the price of one good relative to
the prices of others.
2. Income Effect
 price reduction, other things
constant, increases the purchasing
power of your income
3. Diminishing Marginal Utility
 the more you consume, buy the
satisfaction, marginal utility
decreases
 changes in total utility resulting from
one-unit change in consumption of a
good
Demand Curve
 graph that illustrates the demand for
a product
 how much consumer desire for a
product changes as the price
changes
Demand Schedule
 table showing quantity demanded of
a good service at different price
levels
 can be graphed as a continuous
demand curve
Quantity Demand
 specific quantity that buyers are
willing and able to buy at a specific
demand price, it is but ONE point on
a demand curve
Change in Quantity Demanded
 change from one price – quantity
pair (movement of points)
Change in Demand
 change in the entire demand
relations
 shift of curve to the left (demand
decreases) or right (demand
increases)
Individual Demand
 individual consumer
Market Demand
 sum of the individual demands of all
consumers in the market
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Changes that Shifts the Demand Curve
a. Changes in Consumer Income
 same as income effect, based on the
consumers
 normal good (direct; cheap) and
inferior goods (indirect; expensive)
are depending of the income of the
consumer
b. Changes in the Prices of the Related
Goods
 Substitutes
 products that can be used in place
of each other
 Complements
 certain goods often used in
combination
 if two goods are complements, a
decrease in the price of one
increases the demand for the other
c. Changes in the Size or Composition of
the Population
 if the population grows, the number
of consumers in the market
Increases, so demand increases
 if the total population remains
unchanged, demand could shift as a
result of a change in composition of
the population
d. Changes in Consumer Expectations
 can shift the demand curve
 change in price expectations also
can shift demand
 an expectation that the price of a
certain product will increase of
decrease can shift the demand curve
(rightward or leftward)
e. Changes in Consumers’ Tastes
 tastes’ are consumer’s likes or
dislikes
Law of Supply
 higher the price, higher the quantity
Supply
 relation showing the quantities of
good producers are willing and able
to sell at various prices during a
given period of time
Changes that Shifts the Supply Term
a. Changes in Other Goods
 changes in the price of a certain
product affects the production of its
relative product
b. Changes in Resources
 increase in resources prices reduces
the supply and the supply curve is
shifted leftwards
 decrease in resources prices
increases the supply and the supply
curve is shifted rightwards
c. Changes in Technology
 improvement in technology enable
more efficient production of goods
and services
 reduction of production costs and
increase of profit
 supply is increased and supply curve
is shifted rightwards
d. Changes in Number of Seller
 increase in number of sellers will
increase supply and shift the supply
curve rightwards
 decrease in number of sellers will
decrease the supply and shift the
supply curve leftwards
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e. Changes in Suppliers’ Expectation
 effect of suppliers’ expectations on
supply is difficult to generalize
 may affect current supply
Market Equilibrium
 when the quantity consumers are
willing and able to buy equals the
quantity producers are willing and
able to sell
 number of supply is equal to the
number of demand
 Qd = Qs
Disequilibrium
 factors that make disequilibrium, but
also force to make equilibrium
 force market to attain equilibrium
 mismatch between quantity
demanded and quantity supplied as
the market seek equilibrium
 usually temporary, except when the
government intervenes to set the
price
1. Surplus
 at a given price, the amount by
which quantity supplied exceeds
quantity demanded
 usually forces the prices down
 good for customers
 bad for supplier
2. Shortage
 at a given price, the amount by
which quantity demanded
exceeds quantity supplied
 usually forces prices up
 good for supplier
 bad for customers
Market Exchange
 voluntary because both consumer
and supplier will benefit
 consumer: willing and able to
spend
 supplier: willing to sell product
at a given price with their given
assets
 role of price: to give a limit on
the use resources; indicates its
importance and scarcity
 “invisible hand” – Adam Smith
 individual choices of buyer
 consumers will act upon their best
interest
 forces market to attain market
equilibrium aside from surplus and
shortage
 Transaction Cost
 amount of time and information used
for market exchange to occur
 Markets
 lessen transaction costs
 consumers don’t have to go to other
places
 suppliers are easily accessed and are
more attractive to consumers
 literal stores
Factors that Cause Equilibrium to Change
1. Changes in Supply
2. Changes in Demand
3. Changes in Supply and Demand
Changes in Demand Curve
 direct
Page 4 of 8
Changes in Supply Curve
 inverse
Changes in Demand and Supply
 Government interferes in the market
which results to disequilibrium
1. Price Floor/Support (surplus)
 minimum price allowed/legal above
where the good can be sold
 must be higher than the equilibrium
price
 guarantee return for suppliers
 like target price
2. Price Ceiling/Control (shortage)
 maximum price allowed/legal below
in which good can be sold
 so consumers won’t be abused by
increasing prices
3. Other Sources of Disequilibrium
 sometimes when new products are
introduced, or when demand or
supply changes,
 temporary until market will reach
equilibrium
 Ex: new release of clothes and no
one buys, store chooses to have a
clearance sale to avoid surplus
Surplus Difference
= (quantity supplied – quantity demanded)
(price)
 used to determine how much to pay
the farmers affected during The
Great Depression
ELASTICITY
Elasticity
 responsiveness of buyers/sellers to
the changes in price
Elasticity of Demand
 measure of the consumers response
with the change in price
Price Elasticity of Demand
1. Elastic
 will NOT purchase/avail a good or
service if the price increases
 less than 1
 quantity demanded has a greater
change than price
 results to a decrease in revenue
 Ex: price change of +5% and
demand falls by -10%
2. Unit Elastic
 will purchase/avail a good or service
if the price decreases
 equal to 1
 quantity demanded is equal to price
 results to unchanged revenue
 Ex: 10% change in quantity
demanded /10% in price = 1
3. Inelastic
 will STILL purchase/avail a good or
service if the price increases
 more than 1
 quantity demanded has a smaller
change than price
 results to an increase in revenue
 Ex: price change of +10% and a
demand fall of -5%
Page 5 of 8
Percentage Change in Quantity Demand
-------------------------------------------------
-----------------------------------
Percentage Change in Price
percent change = (current figure – base
figure) / base figure
Arc Elasticity (Midpoint)
 computed by choosing two points
on the demand curve and comparing
the percentage changes in quantity
and the price on those two points
= (Q2-Q1) / (Q2+Q1/ 2)
------------------------------------------
---------
(P2-P1) / (P2+P1/ 2)
Point Elasticity
= (Q2-Q1) / Q1
-------------------------------
(P2-P1) / P1
Income Elasticity of Demand
 measures how the quantity demanded
changes as consumer income changes
 normal and inferior goods
IED = percent change in quantity demanded
/ percent change in income
Cross Price Elasticity of Demand
 measures how quantity demanded
changes as the price of a related
good changes
 substitution/alternative (+) and
complement (–) of a good
question, the greater the good’s
elasticity of demand
2. Share of Consumer’s Budget Spent on
the Good
 the more important the item as a
share of the consumer’s budget,
other things constant, the greater
the price income effect of a change
in price, so the more elastic is the
demand for the item
3. Duration of Adjustment Period
 the longer the period of adjustment,
the more responsive the change in
quantity demanded is to a given
change in price
Substitute
a. close
 small increase in the price of a good
will result to an increase in the
quantity demanded in the other
good
b. weak
 big increase in price but small effect
in other good
Complement
a. close
 big increase big effect
b. weak
 small increase small effect
Market Structures

Determinants Homogenous
 standardized products
1. Availability of Substitutes  ex: oil
 the greater the availability of
substitutes for a good and the more Differentiated
similar these are to the good in  there is a distinction for the product

Page 6 of 8
  ex: soft drinks  MC < MR: increase production

Significance of the Market Structure Law of Diminishing Return

 amount of market power  Ex: the more employees the less
 pricing work, but the more expense
 differentiate products
 advertisements Explicit Cost
 presence of competition  actual costs that you need to
sacrifice to be able to put up a
Cost-Benefit Analysis business
 checking the weight of cost and  usually monetary value
benefits of a certain decision  Ex: capital
 maximize profit
a. Fixed Cost Implicit Cost
 constant expenses that a  not that exposed
business has  not actual money
 Ex: rent, machinery, building  Ex: time
b. Variable Cost
 varies with the volume of
production
 Ex: materials, wages, utilities

Total Revenue = quantity x price

Marginal Cost-Marginal Revenue

Perspective
1. Marginal Cost
 increase in cost that accompanies a
unit increase in output
 additional cost associated with
producing one more unit of output
 MC = change in total cost / change
in quantity
2. Marginal Revenue
 additional profit that will generated
by increasing product sales by one
unit
 MR = change in total revenue /
change in quantity

Importance
 aims to reach MC = MR
(intersection) to maximize profit
 MC > MR: decrease production

Page 7 of 8
 MONOPOLISTIC PERFECT
MONOPOLY OLIGOPOLY
COMPETITION COMPETITION
1. Number of one few many very large
firms or sellers (government number
in the industry regulated)
2. Type of unique some differentiated homogenous
product (product has oligopolists or
produced no close produced standardized
substitute) differentiated
products;
some
produced
homogenous
or
standardized
products
3. Firm’s tremendous possibility of limited influence no influence
influence over influence price over price over price
product’s price collusion (influence
among cartels because of
demand and
competition)
4. Entry of a entry is quite difficult relatively easy very easy
firm into the blocked because of
industry other
established
firms in the
industry
5. Use of ads are differentiated ads emphasize no need for
advertisements usually used oligopolists brand names ads
for public make use of and trade-marks (no consumer
relation ads to stress preference)
purposes product
differentiation
6. Example of Electric Differentiated: Fast food Rice Industry
an industry Service Cereal Industry
Industry Industry
Standardized: Ex: cereal
Ex: Meralco Oil Industry

Ex: Smart and

Globe

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